Euro Problems

This country had a national railroad that received $100 million euros a year in revenue but had expenses of $700 million. All public jobs paid an average of 3 times what the private sector paid. Beauticians, musicians and radio announcers were retiring with state support as early as age 50 (women) and 55 (men) because their work was classified as “arduous.” On the revenue side, “The people never learned to pay their taxes…because no one is ever punished.” And finally, the government itself really wasn’t quite sure how much its debt was soaring because its numbers were inaccurate.

Described by Michael Lewis in an October Vanity Fair article, this country is Greece.

So, doesn’t it make sense that the first bailout was not enough? And now, euro zone officials have to figure out once again, what to do about Greece.

In “Greece Slips Farther Behind Budget Cut Target,” the WSJ tells us that the choice is either a debt default or “that Greece will be a ward of its euro-zone peers for years to come.” This NPR Planet money blog also explains the euro zone’s plight.

The Economic Lesson

Greek finances are so worrisome because they could trigger a banking emergency. It all began with Greek bonds. In order to borrow the money they needed to cover their spending, the Greek government borrowed money by selling bonds. Euro zone banks bought these securities.

The big worry is a Greek default if they “restructure” and delay bond payments or refuse to pay what is due. A default could lead to a domino of financial failures because banks’ assets–their Greek bonds–will be worth much less.

An Economic Question: How might the situation faced by the euro zone compare to the U.S. when the Articles of Confederation were the law of the land?